What Are Prop Trading Firms?

What are prop trading firms?

Funded trading companies or “prop firms” have exploded in popularity over the past few years.

If you’ve been around online trading communities, chances are you’ve seen the phrase “prop firm” tossed around like it’s the hottest ticket to financial freedom.

The primary dynamic driving the industry’s growth is the democratization of access to trading capital.

This means that more people are getting easier access to money they can trade with. It used to be that only large institutions or wealthy individuals could trade significant amounts because they had the capital.

Now, prop trading firms offer everyday traders (potentially) the same opportunity!

The core value proposition is straightforward and powerful:

Instead of needing to deposit tens or hundreds of thousands of dollars into a personal trading account, a trader can pay a comparatively small “evaluation fee” (often a few hundred dollars) for the chance to manage a large, firm-backed account. 

Promising traders access to large pools of capital for a relatively small upfront fee, they’ve become an attractive gateway into the trading world for thousands of retail traders who would otherwise lack the funds to meaningfully trade the financial markets.

While the model has enabled some traders to achieve financial independence, it has also drawn criticism for predatory practices, leading to widespread debates on their legitimacy.

Videos on TikTok show young traders sipping coffee in Bali while their trading dashboard shows six-figure balances. YouTube thumbnails scream, “$200,000 FUNDED IN 7 DAYS!” 🤑

It’s flashy. It’s exciting. And for many beginner traders, it’s the first time they hear about the possibility of trading with someone else’s money instead of their own.

But here’s the first reality check: while the concept of prop trading is very real, the version of prop firms you’re seeing online is very different from the ones Wall Street has known for decades.

To understand what prop firms really are, we need to go back to basics.

What Does “Prop” Even Mean?

“Prop” is short for proprietary, which simply means “owned by the company.”

So when we say proprietary trading, it means the company (the prop firm) is trading with its own money, not on behalf of clients.

In traditional finance (TradFi):

• A bank might have a “prop desk,” where traders use the bank’s capital to make speculative bets.
• A hedge fund might allocate part of its portfolio to in-house traders, with profits going directly to the firm.

In both cases, the prop traders get access to big capital pools, but they don’t have to risk their personal life savings.

Now, the online “retail” prop firm world is built on this same idea: “You trade their money, not yours.”

BUT with some key differences.

The Key Difference Between Traditional and Retail Prop Firms

It’s important to separate traditional prop firms (the Wall Street version) from retail prop firms (the online version).

Traditional prop firms

• Established trading companies like Maven, DRW, Jane Street, Optiver, SMB Capital, or proprietary trading desks within financial institutions.
• Traders typically need proven experience, strong educational backgrounds, or must pass rigorous interview processes and trading simulations.
• The firm provides actual capital and profits directly from trader performance in live markets. Traders are employees or contractors who receive salaries, bonuses, profit splits, and sometimes benefits.
• Profit splits can range from 50/50 to less favorable ratios for the trader, such as 30/70 or 40/60, but these arrangements are typically supplemented with a stable salary and paid training period.
• The firm has a vested interest in trader success because poor trading directly costs them money.

Retail prop firms

• Online platforms that sell access to “funded” accounts.
• Anyone with a credit card and an internet connection can sign up. No experience verification required.
• Firms profit heavily from challenge fees.
• Advertise generous profit splits (80/20, 90/10) that sound much better than traditional firms, but most traders never reach the payout stage.
• Traders are not employees; they’re customers paying for a service.

This difference is important because it explains why retail prop firms can look so accessible yet operate with very different incentives.

Traditional firms succeed only when their traders succeed…they’re partners in profit. Retail prop firms can be profitable even if every single trader FAILS, as long as enough people keep paying challenge fees.

This misalignment of incentives is at the heart of why retail prop trading can become a trap for aspiring traders.

“Retail” prop firms are called this because they offer proprietary trading opportunities to retail traders, meaning regular individuals rather than professional, institutional traders. The term “retail” distinguishes these prop firms from traditional institutional proprietary trading, which is typically reserved for professionals on salary or contract and not open to the general public.

Understanding How Retail Prop Firms Work

Prop firms (also known as “funded trading companies“) differ from traditional brokerage accounts by providing traders with the firm’s capital to trade financial instruments like forex, futures, stocks, indices, metals, or crypto.

The Retail Prop Trading Firms’ Pitch to Aspiring Traders:

• Individuals apply to join and must demonstrate trading skill or discipline by paying for and passing structured evaluation programs with strict risk limits, such as daily loss caps or maximum drawdowns.
• Once funded, traders use the firm’s capital to trade stocks, futures, forex, or other instruments.
• Profits generated are split between the trader and the firm, often through predetermined percentages.

The process generally involves:

1. Evaluation (or “Challenge”) Phase: Traders pay a fee (e.g., $150 for a $25,000 account) and must achieve a profit target (typically 8-10%) within time limits, while staying within drawdown rules (e.g., no more than 5% daily loss or 10% overall).
2. Funded Phase: Successful traders get a “live” account, often simulated but backed by real capital, with profit splits favoring the trader (70-90%). Firms may offer scaling, increasing capital based on performance milestones, up to millions.

Revenue Model: Firms earn from evaluation fees (profitable since over 90% fail) and their profit cut. Some use A-book (hedging trades externally) or B-book (internal matching) models, but many evaluations are demo-based to minimize risk.

This structure appeals to undercapitalized traders but raises questions about fairness, as firms benefit most when participants fail and repurchase challenges.

Retail prop firms are not really prop firms. A more accurate name for them would be:

• Funded Trader Programs. It describes the core service: you pass a test (“challenge” or “evaluation”) to get funded.
• Evaluation Platforms or Simulated Capital Challenge Firms. This highlights that the primary business is testing traders through simulated environments, not deploying its own capital for speculative trading like a traditional prop firm.

The Promise of Retail Prop Trading Firms

Retail prop firms, the kind most beginner traders will encounter, make a very enticing offer:

“Trade large amounts of capital.”

• Even if you only have $500 in your bank account, you can sign up for a challenge that gives you access to $50,000, $100,000, or even $200,000 accounts.
• This is incredibly appealing to traders who feel limited by their small accounts. Instead of making $50 on a good day with your own $1,000, you could theoretically make $500+ with a $100,000 account using the same percentage gains.
• The marketing emphasizes that your skill, NOT your bank balance, is what matters. It levels the playing field, or so it seems.

“Keep most of the profits.”

• Prop firms often advertise profit splits like 80% to the trader, 20% to the firm, meaning 80% of profits to you, 20% to us.”
• Some even claim 90/10 splits, making it seem like the firm barely takes anything.
• On the surface, this looks incredibly generous. If you make $10,000 in profit, you walk away with $8,000 or $9,000. What other business lets you use their capital and keep that much?

“No personal risk.”

• If you blow up your funded account, you don’t lose your life savings. The firm absorbs the loss (or so the marketing suggests).
• This is positioned as the ultimate safety net. You can trade aggressively, take calculated risks, and if it doesn’t work out, you simply restart without financial ruin.

“Low entry cost.”

• Instead of needing $10,000 to trade, you can “rent” access to capital by paying a one-time evaluation or “challenge” fee (anywhere from $100 to $1,000+).
• For someone with limited capital, this seems like a no-brainer. Why save for years when you can start trading large accounts today for the price of a fancy dinner?

“Scaling opportunities.”

• Some firms say you can increase your funded capital if you hit milestones. For example: start with a $50,000 account, “scale” to $100,000, then $200,000, then become one of those traders on the leaderboard pulling in six figures.
• This creates a gamified progression system that keeps traders hooked. You’re not just trading….you’re “leveling up” toward bigger accounts and bigger payouts.

Why Beginners Find This So Attractive

If you’re a beginner trader, prop firms check nearly every box of what you want:

• No big bankroll required. Most retail traders can’t afford to risk $10,000 of their own savings in the market. A $200 challenge fee is more manageable.
• Safety net illusion. You believe you’re trading with “house money,” so the fear of blowing up feels reduced.
• Fast-track to big money. Instead of grinding it out with small accounts ($100 → $200 → $500), you can jump straight into managing six figures.
• Social proof. Online communities are filled with traders posting payout screenshots, challenge pass certificates, and motivational stories.

Put simply, prop firms look like the shortcut to becoming a professional trader.

The Sales Funnel of Prop Firms

Let’s break down the journey most retail traders experience:

1. Discovery
   • A trader sees an ad: “Turn $300 into $200,000 capital in 7 days!”
   • Curiosity kicks in. Then greed.
2. Sign-Up
   • The trader pays a challenge (or “eval”) fee (let’s say $500 for a $100,000 account). That’s 0.5% of the capital! What a bargain!
   • Rules are explained: hit 8% profit target, don’t lose more than 5% in a day, and pass in 30 days.
3. Challenge Attempt
   • Spoiler alert: Most traders fail. The firm keeps the $500.
   • Some traders pay again to retry.
4. Funded Stage (for the few who pass)
   • Trader now gets access to a “funded account.”
   • Must follow strict rules to avoid disqualification.
   • If they profit, they can request payouts.
5. Scaling (for the rare elite)
   • A tiny percentage scale accounts, manages large capital, and builds sustainable payouts.

This funnel is why so many traders get hooked: it feels achievable, and every failure can be rationalized as “just one more try.”

Common Marketing Hooks You’ll Encounter

A lot of prop firms are masters at marketing, and their messaging is carefully designed to appeal to your aspirations while downplaying the risks.

1. “Join our leaderboard!”
   • Creates competition and social validation.
2. “We’ve paid out millions!”
   • Highlighting big payouts, but not showing how many failed challenges funded those payouts.
3. “90% profit split!”
   • Sounds generous, but only matters if you’re already profitable.
4. “Start today for just $100!”
   • Lowering the barrier to entry makes retries tempting.

These hooks are effective because they tap into trader psychology: greed, hope, and the desire for recognition.

The Psychological Appeal of Prop Firms

Prop firms are designed to attract beginners because they:

• Make the dream accessible. You don’t need to be rich or connected.
• Reduce fear of loss. “It’s not my money I’m risking.”
• Offer social validation. Passing = badge of honor. Payouts = status symbols.
• Encourage repeat attempts. Failing is normalized: “Everyone fails at first, just try again.”

This cycle keeps traders engaged….and keeps money flowing to the firms.

Beginner’s Misconceptions at This Stage

Before diving into myths and realities in the next lesson, here are the most common misconceptions beginners have after learning about prop firms:

1. “If I pass once, I’m set for life.”
   • TRUTH: Passing a challenge is just the beginning. Maintaining consistency is far harder.
2. “Prop firms want me to win.”
   • TRUTH: Their survival doesn’t depend on you winning; it often depends on you failing.
3. “It’s easier than trading my own money.”
   • TRUTH: The strict rules can actually make it harder.
4. “I’ll make six figures in my first year.”
   • TRUTH: The majority of traders never see a single payout.

Key Takeaways

• A prop firm is a company that lets you trade with its money, but online retail prop firms operate differently from traditional ones.
• They promise access to large capital, high profit splits, and reduced personal risk.
• The appeal is strongest for beginners with small budgets who want a fast track.
• The reality is that most traders fail challenges, and firms make money whether you succeed or not.

We’ve now covered what prop firms are and why they seem so appealing, especially for new traders. But the promises don’t always match the reality.

In the next lesson, we’ll dig into myth vs. reality: what prop firms say versus what actually happens once you’re inside.